7 Energy Issues Candidates Don't Grasp

Few politicians understand the fundamental principles of energy production, delivery or consumption.

Politicians are crisscrossing the United States offering all sorts of silly promises. When it comes to energy, few candidates seem to understand the fundamental principles of energy production, delivery or consumption. To help readers assess the candidates, here are seven energy issues most political candidates don't seem to grasp:

1. The nation's power grid is already energy independent. According to the Energy Information Administration (EIA), there is very little oil in the nation's electricity. Adding more wind or solar power plants to the grid will not advance the national goal of energy independence or energy security one iota.
2. Federal subsidies for wind and solar development actually benefits taxpayers. Taxpayers make money when the federal government offers tax credits for wind and solar power generators. The government offers a temporary tax credit, not cash, against taxable profits the investment actually earns. If there is no profit, there is no credit and no loss to taxpayers. If there is a profit, there is only a credit in the early years and that credit is a reduction in potential taxes. In the later years, the tax credit evaporates and the facility is creating huge profits. With no expenses, solar and wind plants are suddenly in the highest possible tax rate, earning the federal government multiples over any tax credits previously earned.
3. Adding solar power to the grid will lower energy prices. In deregulated markets, power sources are generally dispatched in order of their production costs, where the highest cost unit needed to meet demand sets the market-clearing price. Since the production cost of solar power is near zero, adding solar to the grid will displace the most expensive generator. Displacing generators that are sitting near the margin will cause the next-lower generator to set a new and lower market-clearing price. Lower market-clearing prices mean lower energy prices.
4. In the United States, the nuclear renaissance is permanently on hold. Barriers to building new nuclear power plants are more about financing and less about federal regulations. The biggest barrier is cost. A single new nuclear plant costs more than most utilities are worth. A second barrier is states that decided to restructure and deregulate their utilities. In deregulated states, utilities cannot add new generators in the state's rate base and therefore utilities cannot financially hedge new generation against ratepayers. Yes, Southern (SO) and SCANA (SCG) may complete a couple of new nuclear units, but these utilities are operating in regulated states and they have been allowed to hedge their investment against ratepayers. Most all other utilities, such as Dominion Resources (D), Duke Energy (DUK), NextEra Energy (NEE) and Exelon (EXC) passed many regulatory hurdles, but put their nuclear plans on permanent hold.
5. The United States will soon need 100 new nuclear power plants. The nation's existing fleet of nuclear power plants is aging and will soon need replacement. In addition, as more coal plants rapidly retire, the nation's fleet of base-loaded power plants is dwindling to dangerously low levels. To serve base load with reliable power, utilities have only three options: nuclear, coal and natural gas. Each option, including natural gas, offers regulatory and public acceptance barriers.
6. The United States is exporting gasoline, diesel and jet fuel to other countries. For the first time since 1949, the United States has become a net exporter of distillate products. According to the Department of Commerce, distillate products are the nation's second-largest export. This raises a question about drilling. If we drill more as some suggest, will we lower prices at the local pump or will we export more of our products to other countries.
7. Transportation, not drilling, is the single-largest issue facing the energy industry. According to Baker Hughes (BHI), about 2,000 rigs are currently drilling in the United States. Approximately 66% of those rigs are seeking oil and the remaining is natural gas. Bakken oil producers have been forced to discount their prices because they lack pipelines and cannot economically deliver their product to the market. At the same time, the nation is flooded with natural gas, yet New England must import 25% of its natural gas as LNG from foreign countries. The problem is pipelines. They are either too small or they don't reach all markets.

The most challenging questions have to do with our values. As a nation, do we value free markets more than local gasoline prices? Do we expect states to chart their own course or should we empower a larger federal government to dictate national energy policies?

At the time of publication, the author had no positions in any of the securities mentioned.